“I have a big debt problem. There are attachments on my account, maintenance liabilities and about 30 creditors permanently seek my boss. My debt is approximately €50,000. I have to deal with €800 per month. From this amount I’ve to pay my rent, heating and electricity and I still have not eaten yet. I do not own a car and have no other possessions. But I have a job and earn actually €1,100 monthly. I do not know how to continue. I'm afraid that I even lose my job. Please help me!”

E., via e-mail

Source: Caritas Germany

According to EU figures, about 80 million citizens currently live in or on the threshold of poverty. In effort to fight poverty and social exclusion, the European Union set specific targets: By 2020 the number of people suffering from poverty risks shall be reduced by 20 million. The poverty target is part of the measures proposed by the European Commission’s ten-year plan 'Europe 2020'. But it has become more and more uncertain whether these goals can be reached in time. The high levels of unemployment and decreasing levels of social protection resulting from the economic and financial crisis have led to an increasing number of vulnerable people. Many are exposed to financial exclusion and over-indebtedness. Caritas Czech Republic[1] identified over-indebtedness as the number one poverty trap in the Czech Republic in 2015. The number of insolvency petitions by individuals has increased to previously unheard of levels[2]. Many single parents are affected. In light of these observations, Caritas considers the current legislation on lending and consumer protection to be inadequate. The situation is further aggravated by the low financial literacy level of large parts of the population; moneylenders’ services exploit this situation and have no restrictions imposed on their services.

Compared to many other EU-countries, Germany was probably less affected by the economic crisis. But even there, the number of indebted people is still growing.[3]

Overcoming poverty is mainly a political task. While poverty has to be fought by many ways and efforts, reducing or cancelling debts could be one important component. Debts are, for instance, a serious obstacle to access better employment. Employers are less likely to give jobs to people subject to garnishments[4] of their salary. Households having money troubles risk a temporary or definitive interruption of gas, electricity or water supply- or eventually losing their home altogether. Surely, not every indebted person is poor and not every poor person is indebted. But if you’re poor and have debts in addition, it will be very hard to overcome poverty without solving your debt-related problems.

And that is where debt-counselling comes into play. In Germany, professional debt counselling was started in the early 80s, when rising unemployment rates accompanied by cut-backs of government welfare and declining wages led to rising bust-rate[5] of Consumer Loans as well. Today, there are about 1400 agencies nationwide run by welfare associations, consumer networks and public structures. They prepare and accompany indebted people during all stages of the process toward clearing oneself or whole families of their debts, including private insolvency. Perhaps less known is that the tasks and options of debt-counselling-agencies are not limited to setting up informal and legal proceedings. Debt-counselling follows a broader, somewhat holistic approach to tackle the money-related problems of indebted people. While there is no common definition yet, three conceptually different aims of debt-counselling can be identified: Securing livelihoods, debt settlement, and ensuring or enabling employment.[6]

Recent research[7] revealed that the most frequent causes of over-indebtedness in Germany were unemployment and reduced working time, income poverty, business failure, divorce or separation, irrational consumer behavior and sickness. In almost three-quarters of cases (72.5%) one of these six causes was cited as the primary cause by the person seeking advice at a debt-counselling agency. And while most of these figures haven’t changed much during the last years, the factor “income poverty” doubled from 4.9% in 2007 to 10.5% in 2014. Among the over-indebted persons, single parents and long-term unemployed persons composed the biggest groups. This broad range of often combined and interdependent causes makes it necessary that debt-counselling agencies follow multiple strategies to receive sustainable solutions.

Ensuring livelihood is the first and often the most important step. Debt–counsellors, for instance, help clients to access benefits. Ensuring a client’s access to a bank account is also important.[8] Other tasks in this early stage include repealing power cut-offs when clients are unable to pay utility bills, or helping people not to lose their home when they are late in paying the rent. The overall goal is to mitigate the consequences of over-indebtedness and trying to avoid increasing levels of debt.

The next step in a debt settlement process is to elaborate an understanding about the key factors in the client’s process of becoming indebted. It is crucial that clients and counsellors work together in trustful relationships. This is not only a required basis to identify the underlying problems. Executing any measure or procedure would be pointless if clients and counsellors had no consensus about the goals and timelines of their collaboration.

Debt settlement can be informal or follow consumer insolvency proceedings, introduced in Germany in 1999. Since then, insolvency counselling was added to debt counselling as a further field of activity providing debtors with information, advice, and support on their way to discharge remaining debts.

But sometimes solving financial problems would not be possible, unless the client could solve other problems and obstacles first. Debt-counsellors therefore need a good knowledge of the local network of supporting services. Caritas, the largest welfare association in Germany, provides a wide range of social services. The staff members of the about 400 debt-counselling agencies run by Caritas Germany utilize this strong network for the benefit of their clients.

During the last years the positive impact of debt-counselling was proven by research.[9] Studies showed that by helping with debt-counselling, indebted households could reduce their housing and energy problems significantly. They could often remain in their familiar surroundings. Debt-counselling helped them to avert foreclosures and was particularly successful in reducing debts and increasing the income levels. But debt-counselling has not only economic and financial effects. Many debtors who were interviewed in the realm of the research studies admitted that they were much less fearful and generally looked more optimistically into the future. In many cases, the physical condition of people improved. They often slept better and were less likely to get sick. Some debtors received only a reduced level of healthcare because they had debts with their health insurance. Full access to health care offers could be recovered by settling the debt problem. Especially children of indebted households benefitted; child-poverty could often be avoided.

Sometimes totally clearing oneself from all debts is not possible for legal or other reasons. In these cases, debtors must be sensitively prepared and coping strategies sought on to live with their debts. They have to be taught what Caritas calls a positive culture of failure. On the other hand, people managing to solve their financial problems experience themselves as powerful and this has a positive impact on their self-confidence.

This is why social-work is the most common and generally speaking ideal profession among the debt-counselling staff.[10] Of course debt-counsellors need a thorough additional training in economics and consumer law, too. For instance they need a good knowledge and understanding of all the informal und legal tools and procedures which are available and applicable in debt-cancelling processes. But to help debtors to overcome poverty, their main competence must be to promote social change and development, social cohesion, and the empowerment and liberation of people.[11]

In order for debt-counselling services to reach as many affected people as possible and to achieve a high success rate, we recommend EU and national authorities to:

provide a comprehensive geographical coverage of debt-counselling agencies and grant access for all indebted groups. Debt advice should be provided free-of-charge (see also Recommendation CM/Rec (2007) 8 of the Committee of Ministers of the Council of Europe to member states on legal solutions to debt problems);

ensure adequate public funding of debt advice services;

follow a holistic approach in the provision of debt counselling: mitigating the consequences of over-indebtedness, ensuring livelihood, helping people to get access to benefits and opening up prospects. This is needed to address the multidimensional problem of over-indebtedness with a combination of complimentary preventative, curative and rehabilitative policy measures;

harmonise the different rules and regulations within the EU about insolvency and residual debt discharge,

[8] Very important in this context was the DIRECTIVE 2014/92/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 23 July 2014 on the comparability of fees related to payment accounts, payment account switching and access to payment accounts with basic features. In Germany the so called “Pfändungsschutzkonto” (P-Konto) plays a major role to ensure that garnishments to banking accounts are limited.